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Robert McLister: The shortage of homes and the growing population present a great opportunity for those with the financial means
Published on April 26, 2024 • Last updated 14 hours ago • 5 minutes reading
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Experts rarely argue that single-family homes should increase in value faster than multi-family homes. Photo by Postmedia
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“Location, location, location” is what real estate agents preach like a broken record, and for good reason.
But there's a new saying in town: “Home type, home type, home type.” It may not exactly roll off the tongue, but it will influence the appreciation of home more than usual in the coming years.
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Whether you believe Canadian real estate prices will skyrocket like an artificial intelligence stock, crash like a meteor or somewhere in between, there is little argument among experts that single-family homes should rise faster than multi-family homes.
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Housing analyst Ben Rabidoux of Edge Realty Analytics notes that for every single-family home we started building last year, Canada's population grew by 20 people. This is just as one-sided a supply-demand relationship as with real estate.
“It doesn’t look like single-family housing starts are going to improve any time soon,” Rabidoux says.
“Building permits are leading indicators of housing starts, and it is notable that they remain at their lowest level in 40 years across the country.”
Sure, the specter of real estate risk looms large with mortgage rates nearly double the 10-year average. However, for qualified potential home buyers, it may be worth looking beyond the short-term gloom.
It's no coincidence that most economists and real estate analysts are now predicting higher home prices next year, despite record unaffordability. The deficit in single-family homes combined with rising incomes should lead to better price developments for single-family homes as interest rates fall.
Sideline syndrome
Thousands of hopeful Canadians are on the sidelines, waiting for lower interest rates on home purchases. For some this might be a mistake.
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If you have the financial ability to get into the single family home space, waiting for “lower prices” or “lower rates” is a complete gamble. Lots of other people are doing the exact same thing, and lower borrowing costs will ultimately lead to more pent-up demand.
While no one knows where prices and prices are headed, it's reasonable to expect the record-breaking shortage of homes to translate into an increase in prices compared to more plentiful property types like condos. This applies even more to sought-after locations.
Additionally, despite the current rise in bond yields, mortgage rates are expected to fall later this year. Core Canadian inflation is trending downward, unemployment is rising (which is expected to slow inflation and impact renters more than homeowners), and homebuyer salary growth remains strong.
Additionally, the bond market's crystal ball is fully pricing in a rate cut this summer. And let's remember: When a monetary easing cycle begins, the Bank of Canada takes the same approach to cutting rates that I take with potato chips – never just one.
And finally, a word to the smart people: Anyone who has funds, including investors, likes to buy when prices fall. And when they do, they drive up prices for everyone else. This is exactly what has been happening in several markets lately. This potentially makes 2024 a short-term window for marginal and upper-middle class buyers to afford homes.
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Buy correctly
Location is still crucial, but sometimes it's better to buy a house or townhouse a little further from your desired location than a more spacious high-rise apartment. You may also find value in a freestanding fixer-upper to help you build sweat equity. A lot depends on supply and demand in your area, as well as the benefits and lifestyle you want.
When determining the location of the house, the focus should be on the possible resale potential. This requires you to buy in areas that tick more than one of these boxes:
- Above-average population growth in relation to housing construction
- Solid employment growth
- Proximity to amenities
- Access to nature
- A strong school district
- Scenic view
- Public transport nearby
- Low crime rates
- An economy that is not tied to just one industry.
And who will win this location lottery today? The cowboy charm of Calgary, the salty sea breeze of Halifax, the joie de vivre of Quebec City and the rugged shores of St. John are examples of real estate markets that attract crowds.
Overcome the hurdle of buying a house
If that white picket fence seems like too high a hurdle to overcome, here's how some people get started in the land of homeownership:
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Family gifts: By far the most common trick when buying a home is donating a down payment to the family. This includes wealthy parents who give or loan money to their children (note: loans must be included in your mortgage debt ratio and may result in you being ineligible). This includes grandparents – some of whom reverse mortgage their homes to give their grandchildren a living inheritance – which I often don't recommend.
Co-signer: Sometimes getting family or a relative to co-sign on a mortgage is another option, as long as the co-signer understands the potential impact on their own credit, finances and home-buying potential.
Friends system: More and more Canadians are buying homes from friends or relatives. Some even buy with strangers using a co-owner matchmaking service. Of course you want to trust and know who you are going to bed with. And you need an ironclad co-ownership agreement that takes worst-case scenarios into account (e.g., if your roommate doesn't pay their share of the mortgage).
Shared equity: In some regions there are shared equity providers that will give you an interest-free down payment to reach 20 percent. This lowers your payments and helps you avoid costly default insurance. In return, you forego a percentage of your future appreciation until you buy out the shared equity company.
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Hire Purchase (RTO): This involves renting a property for a specific period of time, with a portion of your rental payments being used toward a future down payment. Be aware of the risks, check the company's reputation, and always have any RTO agreement reviewed by a real estate attorney beforehand.
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Given Canada's tense medium-term housing outlook, purchasing a home rather than a high-rise condo may be a better choice for qualified homebuyers who can solve the affordability puzzle. And considering that national average home prices are still 15 percent below their 2022 peak, it's a mystery worth solving sooner than later.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X below @RobMcLister.
Click here to see the lowest nationwide mortgage rates in Canada today
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